Who does FundingKnight lend to?

As a complete beginner to the world of finance and loans, I am going back to basics again with this post. I want to get right to the very core of what FundingKnight can offer businesses looking for a loan.

Looking at the FundingKnight website, it seems like a very straightforward process but in my mind there must be huge amounts of criteria that you would need to meet before even beginning to think about applying let alone the actual paperwork that organising a business loan must entail.

I am endeavouring to find out more, so I asked FundingKnight a few questions about what their basic principles were behind their lending offer.

FK: We specify the following three points for companies looking to borrow money from us:

  • The business must have at least two years trading history
  • They must be limited companies registered at companies house
  • And finally, they must be UK based businesses with a UK bank account

KK: It all sounds pretty reasonable to me and extremely straightforward, but there must be more things to consider beyond approaching FundingKnight as a legitimate business enterprise? Surely you would want to ensure that you are investing in something that is a sound prospect with a solid financial future? As otherwise couldn’t any old debt ridden business be able to approach yourselves in dire straits?

FK: Yes, that’s completely true, lenders come to FundingKnight to get a good financial return and in our approach, there are three key things we look for and to balance applications against, ensuring we lend to the right companies:

  • Is your business well managed?
  • Are you realistic about risk?
  • Will your business generate enough cash to repay our lenders?

KK: Ah ok, that’s more like it – still, it seems very simple and straightforward and basically clear, common sense which has got to be a good thing.

FK: Yes, we think so and we want to make the process as clear and easy as possible as after all, we want to lend money in the same way that businesses wish to borrow money. It’s a win-win situation!

Many of our lenders also want to give the economy a boost and no doubt as FundingKnight grows many will also use it to lend locally but first and foremost people expect a sound return on their money so it’s important to have some good ground rules governing who can apply.

KK: So you don’t offer loans to start-ups?

FK: No we don’t. That’s not intended to suggest that start-ups aren’t a good investment – some are – it’s just that they typically need a different type of funding and benefit from a different type of investor.

KK: Excellent work. Thanks to FundingKnight for idiot friendly responses and I hope that my ignorance will help other people get involved and take advantage of the clear benefits that FundingKnight offer.

Crowdlending vs. crowdfunding… what’s the difference and why does it matter?

blackboard with the word 'debt' written on it

Crowdfunding has become a hot topic recently and the news that Kickstarter has will officially launch its UK operation at the end of this month means that it will probably stay in the headlines.

Whilst the concept is still relatively new in the UK, Crowdcube (the UK’s biggest crowdfunding website) has helped to raise £4 million for small businesses and Seedrs – the first UK crowdfunder to be regulated by the FSA – has a target to help 400 business raise cash from private investors each year.

There is a genuine surge of interest in alternative finance and for many the idea of ‘owning’ a part of a start-up seems really appealing.  Frequently the chance to support an appealing new business idea is a stronger motivator than the potential financial return.  There is a “community funding” aspect to crowdfunding, as it tends to select the businesses that are perceived to benefit people.

So, that’s crowdfunding; Basically the process by which a business, which is often – but not always – a start-up raises funding in return for some type of equity deal or reward.

But what about crowdlending?

Well, we started using the term crowdlending to describe FundingKnight just after writing this blog post on whether peer to business lending needs a new name? (Which in turn took inspiration from the Lend Academy blog in the US)

The key point about crowdlending is that no equity changes hands.  FundingKnight lenders, or those using other P2P websites to lend to individuals or businesses, simply provide “loans”.

In return, they get a rate of return on their savings which very often beats that available from traditional easy access savings accounts (which right now are struggling to beat inflation!)  They take no share of the company, have no say in how the company is run and have no voting rights or other control over day to day operations.

So, why might an independent business that’s searching for business finance prefer to take a loan – otherwise known as “debt funding” rather than sharing out equity in their company.

Knowing that it’s a topic close to the heart of FundingKnight’s founder and CEO, Graeme Marshall, I asked him to share some of his thought on why debt can sometimes trump equity when it comes to funding a business.

Here’s what he said:

“I often see company’s approaching Angels for equity when they really should be looking for debt.  It was one of the reasons I started FundingKnight.  Why would someone running his own business want to burden himself with outside shareholders whose agenda will almost always be different from that of the owners?”

So that’s the first key difference between crowdlending and crowdfunding:

Crowdlending = Lenders make loans and borrowers pay them back.  No shares change hands, no control of the business is given up.

 

Crowdfunding = Investors provide a cash injection in return for equity in the business or some other reward.  Usually, they will then have a say in the future of the business / how it is run.

Next, comes the question of what happens when investors – or lenders – want their money back?  It’s a reasonable question since, after all, circumstances change for all of us.  Today’s rainy day fund is tomorrow urgent repair fund so having a way to access an investment is pretty fundamental.

When it comes to business finance, Graeme says,

“The key question is “how is the equity going to be turned into cash?”  Ideally, Shareholders need to be aligned on this point.  If not, there needs to be a clearly understood strategy setting out how new shareholders are going to get their cash.  Listed companies whose shares are traded avoid this problem…. Private companies are a minefield!”

So, there’s the second real difference:

Crowdlending = A scheduled plan of regular payments is agreed upfront detailing how a lender will be repaid their capital + interest.

 

Crowdfunding = Every business needs its own strategy for how shareholders can realise their cash… and not all shareholders will agree on the best way to do this!

 

And that’s why Graeme believes that profitable businesses who are expanding should look to borrow first:

“If the cash required for expansion is to turn into profitable sales of goods or services, they should have the means of repaying the loan out of these profitable sales.  It’s also a good discipline on a company, as if they are not generating the cash to service a loan, is the expansion really profitable?

At the end of the day, every business who borrows money needs to know how they will pay it back.  If you can’t see this clearly, but the cash you need it clearly building long term value, you need equity.”

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A Crowdlending Journey Begins…

Allow myself to introduce myself… my name is Katie Kennedy and I live on planet ignorant. There. I’ve said it and it feels good, thanks for listening.

Now just to get this straight, I don’t inhabit said world of ignorance all the time, it does however certainly apply when it comes to talking about the world of economics, business and investment. It would be true to say I have extensive knowledge of certain, extremely useful things. For example; I like to think I could sing you almost all of Belle & Sebastian’s back catalogue and equally you could test me on reciting large chunks of 1980s John Cusack movies word for word (go on, try me…) So yes, like I said, all useful stuff.

And yet surprisingly, the world of finance, investments, peer-to-peer lending, crowdlending, crowdfunding, kickstarting, starting-up, peer-to-crowd kicklending (and any other terms you may wish to insert here) still eludes me and I am fiercely illiterate in this language. I have no background, experience or helpfully stashed away knowledge to conveniently mine. I know little about what FundingKnight does or certainly could do. I am, you may say, an idiot in the land that you reside, the land I like to call Moneyland.

So while I may be an outsider in your lavishly funded Moneyland, I feel as thought it’s my responsibility, nay, my duty to endeavor to break down knowledge barriers, decipher jargon and become curious about financial practices. Systems that in fact would be incredibly useful to know and become acquainted with to lots of ordinary non-money minded folk who, by all accounts, can benefit hugely from what FundingKnight does and could, potentially, do for them.

I therefore agree to take on the weighty mantle of the economically ignorant and aim to translate what FundingKnight does, what they invest in and whom they lend to.

So please, join me on my crowdlending journey and as I learn a bit more, it’ll hopefully help answer some questions that us newbies need to understand and could actually benefit from. And in return for your esteemed company, I promise wholeheartedly not to sing.

We like… West Country Radio

One of the reasons we set up our crowdlending business was to provide a way for people to invest in the things that are important to them. You see a business model you like, an ethical standpoint you admire or simply a gap in the market and then invest into a company that fits with your beliefs. You have the power to make good things happen.

As we build up our business we hope to make that dream a reality but in the meantime, we’re keen to help local causes in whatever way we can.

Over the next few weeks, we’ll be looking at business models we admire, want to be involved in or just think are worth sharing. We’ll also follow progress as these companies grow, taking our readers, lenders and investors on a virtual journey.

First out the bag is West Country Radio. Just launched on 13 August 2012, their business is a not-for-profit radio station aimed at promoting the south-west, increasing tourism and promoting businesses, resorts and events. It is a local business aimed at improving the lives of local people.

Its uniqueness comes in the form of how the radio station is broadcast. All presenters broadcast from home studios, transmitting their shows live and pre-recorded. This of course reduces costs enormously and allows money acquired by the station to be used on other things such as marketing and promotion.

What’s more, the station is completely run and produced by volunteers, minimising costs and providing fantastic volunteer opportunities, internships and training for people keen to get involved and learn about how a radio station works.

Opportunities like these are incredibly valuable for a local community and are applicable to all ages, from young people looking to gain experience for the future through to retired volunteers looking to give something back in their spare time.

Whilst relying on volunteers and therefore reducing overheads considerably, West Country Radio are also looking for funders, advertisers and sponsors to aid and increase capacity and grow the station’s listenership. The hyper-local nature of the station means that local businesses and events would benefit enormously from getting involved in the station whilst also helping out in the early stages of growth and helping to benefit the local area.

Local ventures such as West Country Radio are exactly what Funding Knight want to promote. Sometimes, we’ll help by providing business finance via our crowdlending model, and when that’s not viable we’ll help spread the word about local people committed to helping local people. We believe life is about more than just business, it’s about getting back to the roots of community and the warm fuzzy glow you can get as a result.

P2P Lending: Many lenders make light work

Peer to peer lending, including the type of business funding that people to business lenders like FundingKnight offer relies on matching up lots of individual lenders to fund one business loan.  This maximises returns for lenders and helps make P2P Lending better value for all concerned compared to traditional bank business loans.  Today, we explain how things work behind the scenes and why many lenders make light work.

 

 

 

My last post tackled the issue of interest rate spreads and the potentially tricky issue of financial literacy.

Money can easily become something that makes peoples head spin, so today, we’re carrying on with our straightforward explanation of how peer to peer lending works by explaining how lenders can club together to invest in healthy British businesses.

Something that can easily be mis-understood about peer to business lending is that a single loan made available to a borrower might actually be made up of lots, potentially hundreds, of individual lenders who all pool their funds together to finance the loan.

diagram of one business loan being funded by multiple lenders

The process works roughly like this:

A borrower approaches a peer to business lender and applies for a loan. That loan application gets thoroughly checked and analysed by professionals and a decision is taken on whether or not to lend.

If things move forward, the loan will be made available to lenders via the marketplace.  Those wishing to get involved add their money together with funds from other lenders and collectively stump up the loan that the borrower needs.  All of the servicing and money transfers etc. are taken care of by the peer to business lending service who will also often commit to ongoing monitoring of how individual businesses are doing.

The more lenders that are involved in a loan, the more any risk is spread around and reduced.

In reality, of course, during the early days of any peer to peer lending service it will inevitably take time to grow the lending base. That’s why FundingKnight management will also be participating in all of our early loans.

That gives us a personal, as well as a professional interest in ensuring that our loans perform well.

We’ll also work with our initial lenders to ensure that each one of them understands the features of early lending via FundingKnight and is aware of the potential for concentration risk – which occurs when there are less loans available to spread your investment over.

We also have all sorts of plans in development for a secondary market that will help people buy and sell loan parts to help spread their risk or get easy access to their money.

These are exciting times as we put the finishing touches to the FundingKnight peer to peer lending proposition so please do sign up for regular blog updates and let us keep you posted as things progress, and, in the meantime, if there’s something else you’d like us to explain, simply drop us a line via the comment box below and we’ll do our best to help.


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